A stress test for Citigroup? Surely, they jest. It would be like asking Ralph Kramden, that is Jackie Gleason, to run a three-hour marathon.

Yesterday's news that the U.S. government might increase its equity stake in the giant bank sent bank stocks higher for the first time in a long time. But overall, American equities gave up another 3.5%.

Conventional wisdom held that looming bank nationalization is hanging over the financial markets like the sword of Damocles. Yet markets, unlike investors, are not stupid and they know that the amount of capital the government has injected into many banks exceeds those institutions' market value. Offensive though it is to basic free-market sensibilities, the government's lame attempt to find acceptable phrasing for its actions doesn't obscure the fact that 14 banks, most of them dinky, have already been taken over in 2009. Government officials want to convey that nationalization doesn't equal expropriation, but there is a widespread suspicion that several giant banks are insolvent dead men walking, and not simply suffering from liquidity problems.

Another school of thought contends what the markets really want to see is blood, banks' blood. The continuing denial of how weak their balance sheets are by the powers that be-banks and government officials-only is prolonging the pain, they argue. Life support won't cut the mustard.

This view holds that if one or several giant institutions fail, events don't have to follow the disastrous results of the decision by Paulson and Bernanke to let Lehman fail in September. The government could guarantee depositors would come out whole, as they do with bank failures in South America. Then they could negotiate an agreement with bondholders-the new equity owners in most bankruptcies-inject temporary capital and share an equity stake in the new entity, with both parties seeking additional private capital and searching for a new management team.

The lords of Wall Street have displayed manifest inability to run their own businesses, yet the idea that the government could do any better is highly suspect. Just because the Resolution Trust Co. did an impressive job taking over relatively small S&Ls-cleaning them up and selling them in the early 1990s-doesn't mean a similar entity could work the RTC's magic on giant, labyrinthian places like Citigroup, which has divisions it will take any new CEO a few years to discover. The federal takeover of giant Continental Illinois in the early 1980s is much less encouraging than the RTC experience. While the jury is still out on the AIG takeover, initial results are foggy at best.

So probably the only realistic option is to have the places run by the kind of cautious, conservative management that bondholders-turned-owners-against-their-will would choose, while giving the government a meaningful equity stake so taxpayers can recover a fraction of their massive investment. Bankruptcy doesn't have to be the nuclear option that it was back in September.